What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-11-10 compared with 2022-08-12 · 100 added, 98 removed, 296 unchanged (40% of the section changed)

6 unchanged sentences

Additional potential factors include changes in interest rates, the rate of inflation, deposit flows, cost of funds, demand for loan products and financial services, competition and changes in the quality or composition of loan and investment portfolios of the Company.

Other factors that could cause future results to vary from current management expectations include changes in accounting principles, policies or guidelines, and other economic, competitive, governmental and technological factors affecting the Company’s operations, markets, products, services and prices.

operations, markets, products, services and prices.

Further description of the risks and uncertainties to the business are included in the Company’s other filings with the Securities and Exchange Commission.

19 unchanged sentences

Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of deferred tax assets, the fair value of financial instruments, the determination of other-than-temporary impairment on securities and the determination of goodwill impairment.

Please refer to the discussion of the allowance for loan losses calculation under “Loans” in the “Changes in Financial Condition” section.

Please refer to the discussion of the allowance for loan losses calculation under “Changes in Financial Condition - Loans” below.

The Company uses the modified prospective transition method to account for stock options.

8 unchanged sentences

Management determines the appropriate classification of debt securities at the time of purchase and re-evaluates such designation as of each Consolidated Balance Sheet date.

Declines in the fair value of available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses.

In estimating other-than-temporary impairment losses, the Company considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent of the Company to not sell the securities and whether it is more likely than not that it will not have to sell the

securities before recovery of their cost basis.

The Company believes that all unrealized losses on securities at June 30, 2022 and December 31, 2021 represent temporary impairment of the securities, related to changes in interest rates.

Decreases in the fair value of available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses.

In estimating other-than-temporary impairment losses, the Company considers (1) the length

of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent of the Company to not sell the securities and whether it is more likely than not that it will not have to sell the securities before recovery of their cost basis.

The Company believes that all unrealized losses on securities at September 30, 2022 and December 31, 2021 represent temporary impairment of the securities, related to changes in interest rates.

In connection with acquisitions, the Company recorded goodwill in the amount of $29.3 million, representing the excess of amounts paid over the fair value of net assets of the institutions acquired in purchase transactions, at its fair value at the date of acquisition.

4 unchanged sentences

Changes in Financial Condition

Total assets as of June 30, 2022 were $2.066 billion compared to $2.069 billion as of December 31, 2021.

Total assets as of September 30, 2022 were $2.019 billion compared to $2.069 billion as of December 31, 2021.

The decrease was due primarily to a $167.8 million decrease in interest-bearing deposits with banks.

Interest-bearing balances with banks decreased as overnight liquidity was utilized to fund growth in loans and securities, and to pay off long-term borrowings.

The decrease was partially offset by a 34.1 million increase in securities available for sale, and a $49.4 million increase in loans receivable.

The fair value of securities available for sale as of June 30, 2022 was $440.9 million compared to $406.8 million as of December 31, 2021.

The decrease was partially offset by a $77.4 million increase in loans receivable, and a $20.5 million increase in securities available for sale.

The fair value of securities available for sale as of September 30, 2022 was $427.3 million compared to $406.8 million as of December 31, 2021.

The increase in the securities portfolio is the result of purchases executed to invest excess liquidity and to provide pledging for public deposits.

2 unchanged sentences

Management believes that the unrealized losses on all holdings represent temporary impairment of the securities, as the Company has the intent and ability to hold these investments until maturity or market price recovery.

Loans receivable totaled $1.404 billion at June 30, 2022 compared to $1.355 billion as of December 31, 2021.

The $49.4 million increase in loans receivable during the six months ended June 30, 2022 was due to a $16.7 million increase in commercial real estate loans, a $16.1 million increase in residential mortgage loans, and a $13.6 million increase in consumer loans.

The allowance for loan losses totaled $17,017,000 as of June 30, 2022, and represented 1.21% of total loans outstanding, compared to $16,442,000, or 1.21% of total loans outstanding, at December 31, 2021.

The Company had net charge-offs for the six months ended June 30, 2022 of $25,000, compared to $810,000 in the corresponding period in 2021.

Loans receivable totaled $1.432 billion at September 30, 2022 compared to $1.355 billion as of December 31, 2021.

The $77.4 million increase in loans receivable during the nine months ended September 30, 2022, was due to a $15.9 million increase in commercial real estate loans, a $22.1 million increase in residential mortgage loans, and a $30.3 million increase in consumer loans.

The allowance for loan losses totaled $16,931,000 as of September 30, 2022, and represented 1.18% of total loans outstanding, compared to $16,442,000, or 1.21% of total loans outstanding, at December 31, 2021.

The Company had net charge-offs for the nine months ended September 30, 2022 of $111,000, compared to $797,000 in the corresponding period in 2021.

The Company’s management assesses the adequacy of the allowance for loan losses on a quarterly basis.

3 unchanged sentences

In addition, management has included qualitative factors during 2022 which are specifically related to the economic impact of the COVID-19 pandemic.

Management considers the allowance for loan losses adequate at June 30, 2022 based on the Company’s criteria.

Management considers the allowance for loan losses adequate at September 30, 2022 based on the Company’s criteria.

However, there can be no assurance that the allowance for loan losses will be adequate to cover significant losses, if any, which might be incurred in the future.

As of June 30, 2022, non-performing loans totaled $672,000 or 0.05% of total loans compared to $734,000, or 0.05%, of total loans at December 31, 2021.

At June 30, 2022, non-performing assets totaled $1,018,000, or 0.05%, of total assets, compared to $2,476,000, or 0.12%, of total assets at December 31, 2021.

The decrease in non-performing assets during the six month period ended June 30, 2022, was due to sales of properties included in foreclosed real estate.

As of September 30, 2022, non-performing loans totaled $618,000 or 0.04% of total loans compared to $734,000, or 0.05%, of total loans at December 31, 2021.

At September 30, 2022, non-performing assets totaled $964,000, or 0.05%, of total assets, compared to $2,476,000, or 0.12%, of total assets at December 31, 2021.

The decrease in non-performing assets during the nine month period ended September 30, 2022, was due to sales of properties included in foreclosed real estate.

The following table sets forth information regarding non-performing loans and foreclosed real estate at the dates indicated:

(dollars in thousands)

June 30, 2022

September 30, 2022

December 31, 2021

19 unchanged sentences

(b) For loans acquired with specific evidence of deterioration in credit quality, a specific credit fair value adjustment is established at the date of acquisition and will not impact the allowance for loan losses unless actual losses exceed the established fair value adjustment.

During the six-month period ended June 30, 2022, total deposits increased $43.0 million due primarily to growth in interest-bearing demand deposits.

During the nine-months ended September 30, 2022, total deposits increased $12.0 million due primarily to growth in interest-bearing demand deposits.

The following table sets forth deposit balances as of the dates indicated:

(dollars in thousands)

June 30, 2022

September 30, 2022

December 31, 2021

4 unchanged sentences

Time deposits >$250,000

Other borrowings as of June 30, 2022, totaled $4.4 million compared to $30.0 million as of December 31, 2021.

Short-term borrowings increased $10.9 million to $71.7 million at September 30, 2022, compared to $60.8 million at December 31, 2021, due primarily to an increase in cash management account balances.

Other borrowings as of September 30, 2022, were $0 compared to $30.0 million as of December 31, 2021.

The decrease reflects the early payoff of $25.5 million Federal Home Loan Bank term borrowings.

A prepayment fee of $3,000 was

recognized in other expense during the six months ended June 30, 2022.

A prepayment fee of $3,000 was recognized in other expense during the nine months ended September 30, 2022.

Short-term borrowings, which consist of securities sold under agreements to repurchase and overnight borrowings from the FHLB, increased $10.9 million due to growth in repurchase agreements.

1 unchanged sentence

(dollars in thousands)

June 30, 2022

September 30, 2022

December 31, 2021

9 unchanged sentences

Stockholders’ Equity and Capital Ratios

As of June 30, 2022, stockholders’ equity totaled $173.8 million, compared to $205.3 million as of December 31, 2021.

The net change in stockholders’ equity included $14.0 million of net income, which was partially offset by $4.6 million of dividends declared.

In addition, total equity decreased $40.0 million due to a decrease in the fair value of securities in the available for sale portfolio, net of tax.

This decrease in fair value is the result of a change in interest rates and spreads, which may impact the value of the securities.

As of September 30, 2022, total stockholders’ equity was $158.8 million, compared to $205.3 million as of December 31, 2021.

Total stockholders’ equity decreased $60.3 million due to a decrease in the fair value of securities in the available-for-sale portfolio, net of tax, and $6.9 million of dividends declared.

The decrease in fair value is the result of a change in interest rates and spreads, which may impact the value of the securities.

The decrease in total stockholders’ equity was partially offset by $22.1 million of net income.

Because of interest rate volatility, the Company’s accumulated other comprehensive income could materially fluctuate for each interim and year-end period.

A comparison of the Company’s consolidated regulatory capital ratios is as follows:

June 30, 2022

September 30, 2022

December 31, 2021

10 unchanged sentences

The final rule limits a banking organization’s dividends, stock repurchases and other capital distributions, and certain discretionary bonus payments to executive officers, if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above regulatory minimum risk-based requirements.

The capital conservation buffer requirement was phased in beginning January 1, 2016 and ending January 1, 2019, when the full capital conservation buffer requirement became effective.

The Company and the Bank are in compliance with their respective new capital requirements, including the capital conservation buffer, as of June 30, 2022.

As of June 30, 2022, the Company had cash and cash equivalents of $109.7 million in the form of cash, due from banks and short-term deposits with other institutions.

The capital conservation buffer requirement was phased in beginning January 1, 2016 and ending January 1, 2019, when the full capital conservation buffer

requirement became effective.

The Company and the Bank are in compliance with their respective new capital requirements, including the capital conservation buffer, as of September 30, 2022.

As of September 30, 2022, the Company had cash and cash equivalents of $40.9 million in the form of cash, due from banks and short-term deposits with other institutions.

In addition, the Company had total securities available for sale of $427.3 million which could be used for liquidity needs.

Total liquidity of $550.5 million as of June 30, 2022, represents 26.6% of total assets compared to $613.5 million and 29.7% of total assets as of December 31, 2021.

The Company also monitors other liquidity measures, all of which

were within the Company’s policy guidelines as of June 30, 2022 and December 31, 2021.

Total liquidity of $468.2 million as of September 30, 2022, represents 23.2% of total assets compared to $613.5 million and 29.7% of total assets as of December 31, 2021.

The Company also monitors other liquidity measures, all of which were within the Company’s policy guidelines as of September 30, 2022 and December 31, 2021.

Based upon these measures, the Company believes its liquidity is adequate.

1 unchanged sentence

The Company has a line of credit commitment from Atlantic Community Bankers Bank for $7,000,000 which expires June 30, 2023.

There were no borrowings under this line as of June 30, 2022 and December 31, 2021.

There were no borrowings under this line as of September 30, 2022 and December 31, 2021.

The Company has a line of credit commitment available which has no stated expiration date from PNC Bank for $16,000,000.

There were no borrowings under this line as of June 30, 2022 and December 31, 2021.

There were no borrowings under this line as of September 30, 2022 and December 31, 2021.

The Company has a line of credit commitment available which has no stated expiration date from Zions Bank for $17,000,000.

There were no borrowings under this line as of June 30, 2022 and December 31, 2021.

The Bank’s maximum borrowing capacity with the Federal Home Loan Bank was approximately $640,650,000 as of June 30, 2022, of which $4,412,000 was outstanding in the form of borrowings as of June 30, 2022.

There were no borrowings under this line as of September 30, 2022 and December 31, 2021.

The Bank’s maximum borrowing capacity with the Federal Home Loan Bank was approximately $642,371,000 as of September 30, 2022, of which $0 was outstanding in the form of borrowings as of September 30, 2022.

As of December 31, 2021, the maximum borrowing capacity was $607,092,000, of which $29,998,000 of borrowings was outstanding as of December 31, 2021.

Additionally, as of June 30, 2022, the Bank had secured Letters of Credit from the Federal Home Loan Bank in the amount of $104,050,000 as collateral for specific municipal deposits.

Additionally, as of September 30, 2022, the Bank had secured Letters of Credit from the Federal Home Loan Bank in the amount of $101,400,000 as collateral for specific municipal deposits.

These Letters of Credit reduce the availability under the maximum borrowing capacity.

12 unchanged sentences

(Tax-Equivalent Basis,

Three Months Ended June 30,

Three Months Ended September 30,

dollars in thousands)

35 unchanged sentences

Increase/(Decrease)

Three months ended June 30, 2022 Compared to

Three months ended June 30, 2021

Three months ended September 30, 2022 Compared to

Three months ended September 30, 2021

Variance due to

15 unchanged sentences

Changes in net interest income that could not be specifically identified as either a rate or volume change were allocated proportionately to changes in volume and changes in rate.

Comparison of Operating Results for the Three Months Ended June 30, 2022 to June 30, 2021

For the three months ended June 30, 2022, net income totaled $6,855,000 compared to $5,755,000 earned in the similar period in 2021.

The increase in net income for the three months ended June 30, 2022 was due primarily to an $841,000 increase in net interest income and a $1,200,000 decrease in the provision for loan losses.

Earnings per share for the three-months ended June 30, 2022 were $0.84 per share for basic shares and fully diluted shares, compared to $0.70 per share for basic shares and for fully diluted shares for the three months ended June 30, 2021.

The resulting annualized return on average assets and annualized return on average equity for the three months ended June 30, 2022 were 1.35% and 15.19%, respectively, compared to 1.15% and 11.59%, respectively, for the same period in 2021.

Comparison of Operating Results for the Three Months Ended September 30, 2022 to September 30, 2021

For the three months ended September 30, 2022, net income totaled $8,109,000 compared to $6,981,000 earned in the same period in 2021.

The increase in net income for the three months ended September 30, 2022 was due primarily to a $1,181,000 increase in net interest income and a $750,000 decrease in the provision for loan losses.

Earnings per share for the three-months ended September 30, 2022 were $1.00 per share for basic shares and fully diluted shares, compared to $0.85 per share for basic shares and for fully diluted shares for the three months ended September 30, 2021.

The resulting annualized return on average assets and annualized return on average equity for the three months ended September 30, 2022 were 1.57% and 17.93%, respectively, compared to 1.36% and 13.50%, respectively, for the same period in 2021.

The following table sets forth changes in net income:

1 unchanged sentence

Three months ended

June 30, 2022 to June 30, 2021

Net income three months ended June 30, 2021

September 30, 2022 to September 30, 2021

Net income three months ended September 30, 2021

Change due to:

8 unchanged sentences

Income tax expense

Net income three months ended June 30, 2022

Net income three months ended September 30, 2022

Net Interest Income

Net interest income on a fully taxable equivalent basis (fte) for the three months ended June 30, 2022 totaled $17,082,000 which was $819,000 higher than the comparable period in 2021.

The increase in net interest income was due primarily to an $859,000 increase in interest income (fte) on securities due to purchases of securities.

The fte net interest spread and net interest margin were 3.40% and 3.49%, respectively, for the three months ended June 30, 2022 compared to 3.32% and 3.44%, respectively, for the same period in 2021.

Net interest income on a fully taxable equivalent basis (fte) for the three months ended September 30, 2022 totaled $18,369,000 which was $1,183,000 higher than the comparable period in 2021.

The increase in net interest income was due primarily to a $1,026,000 increase in interest income (fte) on securities due to purchases of securities.

The fte net interest spread and net interest margin were 3.61% and 3.74%, respectively, for the three months ended September 30, 2022 compared to 3.49% and 3.61%, respectively, for the same period in 2021.

See “Non-GAAP Financial Measures” described above on page 35.

For the three-months ended June 30, 2022, interest income (fte) totaled $18,281,000 with a yield on average earning assets of 3.74% compared to $17,727,000 and 3.75% for the 2021 period.

Average loans decreased $16.2 million during the three-months ended June 30, 2022, over the comparable period of 2021, while average securities increased $173.1 million.

Average earning assets totaled $1.957 billion for the three months ended June 30, 2022, an increase of $67.1 million over the average for the same period in 2021.

For the three-months ended September 30, 2022, interest income (fte) totaled $20,031,000 with a yield on average earning assets of 4.08% compared to $18,596,000 and 3.90% for the 2021 period.

Average loans increased $36.5 million during the three-months ended September 30, 2022, over the comparable period of 2021, while average securities increased $157.7 million.

Average earning assets totaled $1.966 billion for the three months ended September 30, 2022, an increase of $59.0 million over the average for the same period in 2021.

See “Non-GAAP Financial Measures” described above on page 35.

Interest expense for the three months ended June 30, 2022 totaled $1,199,000 at an average cost of 0.34% compared to $1,464,000 and 0.43%, respectively, for the same period in 2021.

The decrease in interest expense during the three-months ended June 30, 2022 reflects the overall lower level of market interest rates.

The average cost of time deposits, which is the most significant component of funding costs, decreased 0.04% compared to the same three-month period of last year.

Interest expense for the three months ended September 30, 2022 totaled $1,662,000 at an average cost of 0.47% compared to $1,410,000 and 0.41%, respectively, for the same period in 2021.

The increase in interest expense during the three-months ended September 30, 2022 reflects the overall higher level of market interest rates.

The average cost of time deposits, which is the most significant component of funding costs, increased 0.24% compared to the same three-month period of last year.

Provision for Loan Losses

The Company’s provision for loan losses for the three months ended June 30, 2022 was $300,000, compared to $1,500,000 for the three months ended June 30, 2021.

The Company’s provision for loan losses for the three months ended September 30, 2022 was $0, compared to $750,000 for the three months ended September 30, 2021.

The decreased provision reflects a reduction in certain qualitative factors related to the COVID-19 pandemic.

The Company makes provisions for loan losses in an amount necessary to maintain the allowance for loan losses at an acceptable level.

The Company recorded a net recovery of $57,000 for the quarter ended June 30, 2022, compared to a net charge-off of $669,000 for the similar period in 2021.

At June 30, 2022, the allowance for loan losses represented 1.21% of loans receivable.

The Company recorded a net charge-off of $86,000 for the quarter ended September 30, 2022, compared to a net recovery of $13,000 for the similar period in 2021.

At September 30, 2022, the allowance for loan losses represented 1.18% of loans receivable.

Additionally, the allowance for loan losses represented 2,740% of non-performing loans, excluding loans acquired with credit quality deterioration.

Other income totaled $2,489,000 for the three months ended June 30, 2022, compared to $2,187,000 for the same period in 2021.

The increase was due primarily to a $255,000 increase in earnings and proceeds on bank-owned life insurance policies, and an $180,000 increase in other income.

Gains on sales of loans decreased $109,000, while all other categories of other income decreased $24,000, net.

Other income totaled $2,178,000 for the three months ended September 30, 2022, compared to $2,159,000 for the same period in 2021.

The increase was due primarily to a $67,000 increase in earnings and proceeds on bank-owned life insurance policies, and a $185,000 increase in other income.

Gains on sales of assets decreased $104,000, while all other categories of other income decreased $129,000, net.

Other Expense

Other expense for the three months ended June 30, 2022 totaled $10,472,000 which was $980,000 higher than the same period of 2021, due primarily to a $669,000 increase in salaries and employee benefits costs.

Other expense for the three months ended September 30, 2022 totaled $10,139,000 which was $516,000, or 5.4%, higher than the same period of 2021, due primarily to a $142,000 increase in data processing costs, and a $165,000 increase in professional fees.

All other categories of other expense increased $209,000, net.

Income Tax Expense

Income tax expense totaled $1,756,000 for an effective tax rate of 20.4% for the three months ended June 30, 2022 compared to $1,493,000 for an effective tax rate of 20.6% for the three months ended June 30, 2021.

The decrease in the effective tax rate in the 2022 period reflects the increased level of tax-exempt income related to bank-owned life insurance.

Income tax expense totaled $2,100,000 for an effective tax rate of 20.6% for the three months ended September 30, 2022 compared to $1,794,000 for an effective tax rate of 20.5% for the three months ended September 30, 2021.

The increase in the effective tax rate in the 2022 period reflects the increased level of taxable income.

Results of Operations

2 unchanged sentences

(Tax-Equivalent Basis,

Six Months Ended June 30,

Nine Months Ended September 30,

dollars in thousands)

35 unchanged sentences

Increase/(Decrease)

Six months ended June 30, 2022 Compared to

Six months ended June 30, 2021

Nine months ended September 30, 2022 Compared to

Nine months ended September 30, 2021

Variance due to

14 unchanged sentences

Net interest income (tax-equivalent basis)

Comparison of Operating Results for the Six Months Ended June 30, 2022 to June 30, 2021

For the six months ended June 30, 2022, net income totaled $13,983,000 compared to $11,296,000 earned in the similar period in 2021.

The increase in net income for the six months ended June 30, 2022 was due primarily to a $1,166,000 increase in net interest income, a $1,652,000 increase in other income, and a $2,400,000 decrease in the provision for loan losses.

Earnings per share for the six-months ended June 30, 2022 were $1.71 per share for basic shares and fully diluted shares, compared to $1.38 per share for basic shares and for fully diluted shares for the six months ended June 30, 2021.

The resulting annualized return on average assets and annualized return on average equity for the six months ended June 30, 2022 were 1.37% and 14.68%, respectively, compared to 1.16% and 11.49%, respectively, for the same period in 2021.

Comparison of Operating Results for the Nine Months Ended September 30, 2022 to September 30, 2021

For the nine months ended September 30, 2022, net income totaled $22,093,000 compared to $18,277,000 earned in the similar period in 2021.

The increase in net income for the nine months ended September 30, 2022 was due primarily to a $2,347,000 increase in net interest income, a $1,671,000 increase in other income, and a $3,150,000 decrease in the provision for loan losses.

Earnings per share for the nine-months ended September 30, 2022 were $2.71 per share for basic shares and fully diluted shares, compared to $2.23 per share for basic shares and for fully diluted shares for the nine months ended September 30, 2021.

The resulting annualized return on average assets and annualized return on average equity for the nine months ended September 30, 2022 were 1.44% and 15.73%, respectively, compared to 1.23% and 12.19%, respectively, for the same period in 2021.

The following table sets forth changes in net income:

(dollars in thousands)

Six months ended

June 30, 2022 to June 30, 2021

Net income six months ended June 30, 2021

Nine months ended

September 30, 2022 to September 30, 2021

Net income nine months ended September 30, 2021

Change due to:

11 unchanged sentences

Income tax expense

Net income six months ended June 30, 2022

Net income nine months ended September 30, 2022

Net Interest Income

Net interest income on a fully taxable equivalent basis (fte) for the six months ended June 30, 2022 totaled $33,365,000 which was $1,121,000 higher than the comparable period in 2021.

Net interest income on a fully taxable equivalent basis (fte) for the nine months ended September 30, 2022 totaled $51,734,000 which was $2,305,000 higher than the comparable period in 2021.

The increase in net interest income was due primarily to a $2,691,000 increase in interest income (fte) on securities due to purchases of securities.

The fte net interest spread and net interest margin were 3.30% and 3.41%, respectively, for the six months ended June 30, 2022 compared to 3.39% and 3.51%, respectively, for the same period in 2021.

The fte net interest spread and net interest margin were 3.41% and 3.52%, respectively, for the nine months ended September 30, 2022 compared to 3.43% and 3.54%, respectively, for the same period in 2021.

See “Non-GAAP Financial Measures” described above on page 35.

For the six-months ended June 30, 2022, interest income (fte) totaled $35,810,000 with a yield on average earning assets of 3.65% compared to $35,233,000 and 3.84% for the 2021 period.

Average loans decreased $39.6 million during the six-months ended June 30, 2022, over the comparable period of 2021, while average securities increased $183.2 million.

Average earning assets totaled $1.960 billion for the six months ended June 30, 2022, an increase of $124.2 million over the average for the same period in 2021.

For the nine-months ended September 30, 2022, interest income (fte) totaled $55,841,000 with a yield on average earning assets of 3.80% compared to $53,829,000 and 3.86% for the 2021 period.

Average loans decreased $14.0 million during the nine-months ended September 30, 2022, over the comparable period of 2021, while average securities increased $174.6 million.

Average earning assets totaled $1.962 billion for the nine months ended September 30, 2022, an increase of $102.2 million over the average for the same period in 2021.

See “Non-GAAP Financial Measures” described above on page 35.

Interest expense for the six months ended June 30, 2022 totaled $2,445,000 at an average cost of 0.35% compared to $2,989,000 and 0.45%, respectively, for the same period in 2021.

The decrease in interest expense during the six-months ended June 30, 2022 reflects the repricing of higher cost certificates to current market interest rates at maturity.

The average cost of time deposits, which is the most significant component of funding costs, decreased 0.08% compared to the same six-month period of last year.

Interest expense for the nine months ended September 30, 2022 totaled $4,107,000 at an average cost of 0.39% compared to $4,400,000 and 0.43%, respectively, for the same period in 2021.

The decrease in interest expense during the nine-months ended September 30, 2022 reflects a higher level of average demand deposits and lower costing non-maturity interest-bearing deposits.

The average cost of time deposits, which is the most significant component of funding costs, increased .02% compared to the same nine-month period of last year.

Provision for Loan Losses

The Company’s provision for loan losses for the six months ended June 30, 2022 was $600,000, compared to $3,000,000 for the six months ended June 30, 2021.

The decreased provision reflects a reduction in certain qualitative factors related to the COVID-19 pandemic.

The Company makes provisions for loan losses in an amount necessary to maintain the allowance for loan losses at an

acceptable level.

The Company recorded a net charge-off of $25,000 for the six months ended June 30, 2022, compared to a net charge-off of $810,000 for the same period in 2021.

At June 30, 2022, the allowance for loan losses represented 1.21% of loans receivable.

The Company’s provision for loan losses for the nine months ended September 30, 2022 was $600,000, compared to $3,750,000 for the nine months ended September 30, 2021.

The decreased provision reflects a reduction in certain qualitative factors

related to the COVID-19 pandemic.

The Company makes provisions for loan losses in an amount necessary to maintain the allowance for loan losses at an acceptable level.

The Company recorded a net charge-off of $111,000 for the nine months ended September 30, 2022, compared to a net charge-off of $797,000 for the same period in 2021.

At September 30, 2022, the allowance for loan losses represented 1.18% of loans receivable.

Additionally, the allowance for loan losses represented 2,740% of non-performing loans, excluding loans acquired with credit quality deterioration.

Other income totaled $5,828,000 for the six months ended June 30, 2022, compared to $4,176,000 for the same period in 2021.

Other income totaled $8,006,000 for the nine months ended September 30, 2022, compared to $6,335,000 for the same period in 2021.

The increase was due primarily to $1,104,000 of income recognized on previously acquired purchased impaired loans that were carried at a discount, and a $427,000 gain on the sale of a property carried in foreclosed real estate owned.

1 unchanged sentence

Other Expense

Other expense for the six months ended June 30, 2022 totaled $20,630,000, which was $1,686,000 higher than the same period of 2021, due primarily to a $1,146,000 increase in salaries and employee benefits costs.

Other expense for the nine months ended September 30, 2022 totaled $30,768,000, which was $2,201,000, or 7.7%, higher than the same period of 2021, due primarily to a $1,208,000 increase in salaries and employee benefits costs.

Income Tax Expense

Income tax expense totaled $3,610,000 for an effective tax rate of 20.5% for the six months ended June 30, 2022 compared to $2,765,000 for an effective tax rate of 19.7% for the six months ended June 30, 2021.

Income tax expense totaled $5,709,000 for an effective tax rate of 20.5% for the nine months ended September 30, 2022 compared to $4,558,000 for an effective tax rate of 20.0% for the nine months ended September 30, 2021.

The increase in the effective tax rate in the 2022 period reflects the increased level of taxable income.

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What changed 10-Q

Item 2. Management’s Discussion and Analysis